With the tax year end on the horizon once again, and significant changes to tax rates taking effect from April 2013, we examine how individuals can make the most of the currently available tax reliefs.
Here are some tips, based on advice published by David Truman, partner at accountants Menzies LLP this week.
Additional income tax rate cut
The ‘additional’ rate of income tax will be cut from 50% to 45% from 6th April 2013. Just as many entrepreneurs drew down income in advance of the additional rate being put in place just after the Labour Government left office, many will have delayed taking out subsequent income until the start of the 2013/14 tax year. This type of tax planning is prudent for higher-rate as well as additional-rate taxpayers.
“Depending on the terms of your contract, bonuses or dividends can be also deferred into the next tax year while advancing pension contributions to before 5 April 2013.”
The rules governing pension contributions have been tinkered with several times in recent years, and there may be further changes announced on 20th March.
David Truman recommends making the most of your full pension contribution allowance, which is £50,000 for this and the next tax years (2012-13 and 2013-14), however at the last Autumn Statement, the Chancellor announced that this limit would be reduced to £40,000 from April 2014.
“Carrying forward unused allowances from earlier tax years. Individuals may be able to carry unused allowances from the previous three tax years forward. This could allow a one-off contribution of up to £200,000.”
If you are married, you can use intelligent tax planning to make the most out of each partner’s tax-free allowance.
Particularly if one partner is on a low income, or is not working, you may benefit by transferring assets between spouses. You can gift assets, and if you own your own limited company, you can transfer shares to your partner, and reduce your exposure to higher rate / additional rate tax on dividend income.
“This principle extends to Capital Gains Tax (CGT), too. While bed and breakfasting (sale and repurchase) of shares is no longer tax effective, there are two variants which still work; sale by one spouse and repurchase by the other, and sale followed by repurchase via an Individual Savings Account (ISA). Couples can also use these techniques to establish a loss that can be set against any gains.”
Although the IHT threshold looks set to remain at £325,000 for the rest of the decade, individuals are able to gift amounts of money each year on a tax free basis. You can gift up to £3,000 each year (tax free) – and double this amount if you have not used the previous year’s exemption.
Truman also urges individuals to “not forget gifts out of after-tax income, such as regular payments to family members for birthdays or anniversaries.”
Tax efficient investments
ISAs remain the most popular way to save tax. You can currently invest up to £11,280 into an ISA each year – half of this can be saved as cash.
In addition to the ISA, there are a number of more ‘serious’ investment vehicles, for the more adventurous investor, such as The Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) for investments in start-up companies. Venture Capital Trusts (VCTs) exempt investors from tax on gains from disposal of shares.
Truman concluded: “It is important not to make investment decisions based on tax factors alone, however. Specific investment risks must also be considered.”